**INVENTORY CONTROL: The Standard Cost Inventory Valuation System Series**

**Standard Cost**

Think of this as a benchmark or a budget. It’s the cost you expect to pay for making a product. This includes materials, labor, and overhead costs.

**Actual Cost**

This is the real cost you incur when you actually make the product.

**Material Price Variance**

**Definition**

This happens when the price you paid for the materials is different from what you expected.

**Example**

If you expected to pay $5 per unit of material but ended up paying $6, the price variance is $1 per unit.

**Material Quantity Variance**

**Definition**

This occurs when the amount of materials used is different from what you expected.

**Example**

If you expected to use 10 units of material to make a product but actually used 12 units, the quantity variance is 2 units.

**Labor Price Variance**

**Definition**

This happens when the wage rate you paid for labor is different from what you expected.

**Example**

If you expected to pay $5 per hour but ended up paying $6 hour, the price variance is $1 per hour.

**Labor Quantity Varianc**e

**Definition**

This occurs when the amount of time spent is different from what you expected.

**Example**

If you expected to spend 10 hours of time to make a product but actually spent 12 hours, the quantity variance is 2 hours.

**Variable Spending Overhead Variance**

**Definition**

The difference between what you expected to spend on variable overheads and what you actually spent.

**Example**

If you expected to spend $2,000 on electricity but actually spent $2,500, the spending variance is $500.

**Variable Overhead Efficiency Variance**

**Definition**

The difference between the expected and actual usage of the activity base (like machine hours) that drives variable overhead costs.

**Example**

If you expected to use 100 machine hours but actually used 120 machine hours, the efficiency variance would be based on the cost per machine hours.

**Fixed Overhead Budget (Spending) Variance**

**Definition**

The difference between the actual fixed overhead costs and the budgeted fixed overhead costs.

**Example**

If you budgeted $5,000 for rent but actually spent $5,200, the spending variance is $200.

**Variable Overhead Efficiency Variance**

**Definition**

The difference between the budgeted fixed overhead costs based on standard production levels and the applied (or actual) fixed overhead costs based on actual production levels.

**Example**

If you budgeted fixed overhead for 1,000 units but actually produced 1,200 units, the volume variance would measure the effect of producing more or fewer units than expected.

### Part I

Introduction to the

Standard Cost Method

### Part II

Estimating Standard Costs

What To Consider